New Delhi: India’s largest iron ore miner NMDC Ltd is faltering in its performance with April-to-September production declining 7%, even as a crackdown on illegal mining has led to a significant shortage of the key steel-making commodity and growing imports.

“There was excessive rainfall in September,” C.S. Verma, chairman incharge of NMDC, told reporters at a press conference, explaining the fall. “The sales in tonnage terms is also down.”

Production in the first half of 2012-13 fell to 12.24 million tonnes (mt) from 13.15mt in the year earlier, according to a steel ministry statement.

Verma said the company may end the year to March 2013 with an output of about 27mt which would be almost the same as last year’s 27.26mt.

The falling trend in the company’s output is bad news for the steel sector that is already struggling to procure iron ore amid a nationwide clampdown on illegal mining that has curtailed output in Orissa, Goa and Karnataka.

An analyst said many of the small steel makers are running their plants under capacity and imports are rising.

“The domestic iron ore and steel industry is going through a challenging phase given regulatory intervention in various states which bodes well for the industry in the long-term,” said Ashish Upadhyay, associate director, corporates at India Ratings and Research, a Fitch group company. “However, in the short-to medium term, domestic steel manufacturers may face inadequate availability of domestic iron ore and may have to resort to imports to meet their requirements.”

Upadhyay said steel-making capacity in India is slated to cross 100mt by March 2013, will require about 160-165mt of iron ore, and that there could be a shortage of about 30mt.

Orissa has been acting against illegal miners and transporters in the last few years that has led to lower supplies while in Karnatraka, the Supreme Court ordered the closure of several mines last year on an environment degradation case, and most have yet to resume production although the court allowed a regulated reopening recently.

The court also ordered closure of mines in Goa, but this doesn’t affect domestic companies because these largely export ore to China.

“Even before iron ore mines in Karnataka could be operational, there was a ban on mining of iron ore in Goa. These two states accounted for about 35% of India’s production and 65% of India’s exports of iron ore prior to the ban,” Upadhyay said.

Iron ore imports in the April-to-September period has been at 0.6mt, said the steel minister Beni Prasad Verma. Iron ore imports are a recent trend (and date back around two to three years). The steel ministry has played down the issue of imports even though it threatens to widen the nation’s already wide trade deficit.

While large companies without captive mines are importing iron ore, the smaller ones are under stress from low availability of iron ore, compounded by rising costs and uncertain outlook on demand for steel.

“The situation is very bad. We are getting iron ore at the e-auctions, but the quantity is less and quality is very poor,” said senior official at BMM Ispat Ltd, a mid-sized steel maker in Bellary in Karnataka.

NMDC sells its iron ore produced in Karnataka via e auctions.

NMDC has hired KPMG to work out a pricing formula in keeping with the current market trend of monthly revisions of pricing, C.S. Verma said.

The steel minister said the company is setting up a refractory plant with a capacity of 50,000 tonnes in Jagdishpur in Uttar Pradesh at a cost of Rs.75 crore that will be commissioned in 2014.

“There is a lot of money as reserves. So it has to be spent,” he said, explaining the rationale for the project. The Indian government has been working on cash rich state-owned companies to invest in capital-intensive projects as a way of turning the investment cycle around.

In addition, NMDC will scout for mineral reserves all over the world and also diversify into coal, manganese ore and diamonds, minister Verma added.